Last year, the CFPB announced it was beginning the process of drafting rules intended to crack down on harmful short-term payday lending (which is illegal in many states), vehicle title loans, paycheck deposit advances, and other high-cost installment and open-ended loans.
The guidelines, which have to yet to be finalized, are intended to make sure that loans can be repaid, thus reducing the likelihood of borrowers falling into to the cycle of having to borrow more money to repay the old debt.
But this morning’s hearing before the Financial Institutions and Consumer Credit subcommittee turned contentious, with accusations that the CFPB is attempting to strip states of regulatory authority and destroy the institution of small-dollar lending in the United States.
Lawmakers, many of whom have received campaign contributions from lobbyists for the payday and small-dollar lending lobbyists, accused regulators of attempting to craft rules that would limit consumers’ options when it comes to available credit, and drive out small business owners.
CFPB acting deputy director David Silberman countered that the rules could, in the long run, be helpful to businesses, as well as borrowers in need of a quick cash infusion.
Silberman spent much of the hearing dodging accusations and attempts by lawmakers to characterize the Bureau’s potential payday lending rules as overreaching, and implying that states can’t take care of their own residents.
“What made you think that regulators (at the state level) were doing a bad job of protecting residents?” asked Rep. Mia Love (UT), who has previously received campaign money from the American Financial Services Association, which doesn’t just represent small-dollar lenders, but also testified separately from the CFPB later in the day.
In fact Love, is just one of 18 subcommittee members, including Chairman Randy Neugebauer and Financial Services Committee Chair Jeb Hensarling, both of Texas — who received campaign money from the AFSA. Neugebauer and Hensarling were also among the seven subcommittee members who previously received financial backing from payday industry lobbyists at the Community Financial Services Association of America. It’s no coincidence that this group also testified later in the day.
“Our analysis showed there was a problem, people are taking out loans they can’t repay,” Silberman said, noting that any rules the CFPB does issue would not overrule state laws, but would serve as an additional protection for consumers.
Silberman reassured lawmakers that the crux of the CFPB’s potential rules is to ensure that people who seek short-term credit are able to repay their debt without rolling over their obligation and incurring additional fees — essentially falling into a debt trap.
Last year, the CFPB found that only 15% of borrowers were able to repay their debt when it was due without re-borrowing. By renewing or rolling over loans the average monthly borrower is likely to stay in debt for 11 months or longer.
The recently outlined goal of the CFPB is to eliminate debt traps by determining at the outset whether or not a consumer can repay the requested loan while maintaining their other major financial obligations and living expenses.
“Why are you trying to destroy small dollar loans,” Rep. David Scott (GA) — another recipient of AFSA money — asked during the hearing. “We have 75% of American people living paycheck to paycheck.”
The rules, Silberman said, are not meant to, and will not, force small businesses to close.
“We don’t believe it would drive lenders out of business, it would create a level playing field in which loans could be made,” Silberman said.
Lawmakers also accused the CFPB and Silberman of only telling one side of the payday loan issue, that it fails to address consumers who use the service as it’s intended: to bridge a financial gap during times of emergency.
“There are other people who have used this and it worked,” Rep. Love said. “I find it offensive that people aren’t smart enough to make choice.”
Silberman said CFPB research indicates that “30% to 35% of people who use these products work as they are intended and they can get through an emergency,” but that it’s “the other two-thirds of people who don’t have the ability to repay that we want to make the market work for.”
While the subcommittee’s anti-CFPB tenor may have given the impression that implementation of CFPB rules on small-dollar lending was imminent, that’s not the case.
Silberman reminded lawmakers that the Bureau is still in the “early stages” of rule-making. In fact, it is still reviewing comments from businesses, consumers, and others submitted last year.
“We’re listening to feedback, then we’ll put out another outline, and start another comment session,” he said.
And when the Bureau does issues its proposed regulations, both the public and industry will be invited to submit written comments, all of which must be considered before final regulations are issued.